The most profit-generating knowledge when investing in the stock market

The following chart highlights the reality of spending options for governments. A currency-issuing government’s spending is limited only by the availability of real-resources.

Source: Malcolm Reavell

The Canadian government (like most governments) does not understand the monetary system that they are driving. The chart below is implying that the Government believes the tax-payer creates Canadian dollars. Of course, only the spending laws of Parliament can create Canadian dollars — any other dollar would be counterfeit.

Source: Parliament of Canada

Believing and functioning as if the federal government-budget is like a household-budget, is the source of much human deprivation; austerity is murder.

This understanding, which I came to relatively late in life, has been the most profit-generating knowledge of my 45-year participation in the stock market. Knowing and tracking where the money that drives the economy comes from is the secret (even though it is an open secret).

Fund-Flows

Money originates when the currency-creating government spends into the private sector. Focusing on the US economy, since it is the most impact-full Globally, dollars are created when Congressional spending-legislation is enacted and the Treasury directs the central bank to deposit reserves in the private bank accounts of whomever is provisioning the Government.

GOVERNMENT SPENDING = CURRENCY CREATION

Subsequently, Congressional tax legislation causes some of the dollars that were created through Congressional spending to be taken back (out of the private bank accounts) and effectively cancelled; money sitting in the Treasury General Account (TGA) is not part of the economy and is not part of any monetary measure. (In the past, tax dollars were burned in public to prove they were not being left in circulation).

The money that is not taxed back and cancelled is left behind in private-sector bank accounts, and is registered as a deficit for the Government. A deficit for the Government — who creates the money at will — , but a surplus for the private-sector (the non-government sector).

GOVERNMENT SPENDING — TAXES = GOVERNMENT DEFICIT = PRIVATE SECTOR SURPLUS

I call this the “net-transfer”; the net-amount of money transferred from the Treasury to the private sector. This is the most important factor that drives the stock market. If the deficit is growing, the stock market tends to grow. If the deficit is decreasing, the stock market tends to struggle.

Last year at this point, the annualized net-transfer rate was $1,750B/year. Currently, the rate is $1,625B/year which is 7% lower. Even though the nominal spending is 5% higher than last year, the tax-collection is even higher than that, which means less money is left behind in the economy.

Since the start of the fiscal-year (October), the SPX has been trading well above the $3,000B/year rate line (black line below). We continue to expect the SPX to drop like it did last year, or the net-transfer (spending) rate must increase (pink-arrows in chart below).

We are approaching the April tax-take which will drain more money from private bank accounts than it did last year and should put pressure on the stock market in the March-to-April period (chart below).

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